The main function of a manufacturing company is undoubtedly the production of goods. Decisions regarding production depend on the time period in question. There are two time periods that determine and influence production decisions; the short term and the long term period.
The short-term period is one in which the quality of at least one factor of production cannot change, the other term is also called fixed factors. In this period of time, output can be increased by increasing the qualities of variable factors or by improving the efficiency of the production process.
In the short-run production period, the profit-maximizing level is the point at which marginal cost increases until it equals the revenue earned from selling the additional unit. Therefore, marginal costs must equal marginal revenue. If the revenue earned from the sale of an additional unit is greater than the cost of producing the additional unit, then it is worth producing that additional unit, as it will increase profit.
Thus, in the short run, as long as marginal revenue is greater than cots, the firm can increase its profit by producing and selling more units.
As for the long-run period, all the quantities of all the factors of production can vary. Therefore, output can be increased by adding the amounts of all inputs. In this way, profits can be maximized in different ways, such as product diversification to reach more market areas.
Also in long-term production, more brands can be created, such as different flavors, colors, and packaging to increase sales. The company may also choose to operate at the optimal level; this is where marginal cost equals lowest average costs.